Sunday, February 15, 2009

SUMMARY:- Volatile in a narrow range to end the week.- Michigan sentiment falls- China stimulus looks to be working while our social engineering package won't.- Hard to believe but there are signs of economic improvement.- Leadership, regardless of why it is leading, is still leadership.

No short covering as indices hold status quo on a down week.

Stocks were all over the road Friday, but they more or less kept it in the lanes. In other words it was up and down all day but the range was rather narrow. Stocks traded on both sides of the flat line all session long and with 30 seconds left in the session the indices slightly positive. Then some late trades dumped stocks into negative territory on the close. Light volume, flattish breadth. Ahead of the 3-day weekend there was no short covering of note, just undecided trade pushing stocks up and down.

There were the usual strong sectors such as chips and some metals, but overall things were quiet. That is not a bad thing; stock after stock on the report, the leaders in the market, held steady in their solid patterns. Hard to be upset with that. As noted Thursday, if not for the Dow stinking the place up even the continuing lethargy in the NYSE indices would not be that big of a deal.

The news was rather quiet though there were quite a few earnings out. Pepsi was in line on earnings and guidance. ANF in retail beat. WYN in hotels beat after MAR missed big. Toyota announced it was buying out 18K contracts of US workers. Michigan sentiment fell to 56.2 from 61.2, missing the 60.2 expected. Some said that it was due to a loss of confidence that the new Administration could handle the economic morass. Of course to buy that you have to believe that most felt the Administration, or any Administration for that matter, could handle the problems we have. China helped out as reports continue to emerge that China's stimulus package is already yielding results.

All of the news was not enough to push stocks positive even with a 3-day weekend and the chance of more policy announcements ahead. There was simply no interest in pushing stocks higher, and the sellers, while not rushing to cover, were not ready to sell aggressively.

TECHNICAL. After some decent closes in the upper end of the daily trading ranges, Friday was a train wreck. Up and down all session with the indices turning negative in the last seconds of the session on a sharp decline that was, frankly, of the same magnitude of the up and down swings all session.

INTERNALS. Sleepy with flat breadth and volume down 16% to 18%. Up and down and nowhere. On the week the price/volume action was a push with the sellers and buyers putting in the same number of accumulation and distribution sessions.

CHARTS. No movement, at least nothing that changed the character heading into Friday. The indices finished lower for the week with NASDAQ, NASDAQ 100 and SOX in the top half of their 4 month range as well as the more recent 4 week range, and the NYSE indices closed in the bottom half of that same range. DJ30 looks quite ill as it bled to a new post-November closing low twice on the week, the second on Friday. It appears to have a date with the November low. SP500 is a relative laggard, but it is also in a rather well defined 4 week trading range from 800 to 875 that is part of a larger 4 month lateral consolidation. Struggling but not wheezing as is the Dow. NASDAQ is in a rather narrow range itself, managing, however, to make a higher low last week at support at 1500. It is not a thing of beauty but it is a solid pattern. NASDAQ 100 is also trying to put in a higher low and it closed on top of its 50 day EMA after holding the 50 day SMA on the lows for the week. Even with RIMM imploding NASDAQ 100 held up well. SOX is very similar to NASDAQ 100, making a higher low at the 50 day SMA. None are in the clear, but the NASDAQ related indices are in a building process while NYSE is in a bleeding process. Indeed, the NASDAQ indices are pinching off as the pattern narrows after making higher lows and higher highs. A break is coming.

LEADERSHIP. Despite the hacking, sickly DJ30 and the SP500 limping along, many stocks continue to show strong patterns and are in position to break higher. Chips, techs, metals, biotech, healthcare, energy, agriculture, Chinese stocks. Many quality stocks are in good patterns that show accumulation (buying). It is hard to turn your back on the market just because the Dow and its 30 stocks is in the toilet. Remember, DJ30 can sell off to the November low and still be in its consolidation. Thus selling to that level is not the end of the consolidation. If it holds at that level, it is an affirmation. More importantly, what will the LEADERS do during that time? Thus far, when DJ30 struggles and falls these stocks are either moving higher or putting in the work on solid bases.

THE ECONOMY

Signs of improvement defy gloom.

No one thinks the economy is worth a damn right now. Why would we allow $800B to be authorized for spending, stimulus or otherwise, to supposedly help the economy if things were good? The Philly Fed came out Friday and predicted -5.2% Q1 GDP growth, revised from -1.4%. Not much hope in Philly.

No one is looking but there are modest signs of improving data. It is not that the data is out and out strong or showing a clear turn. It never does at first. There are subtle shifts that individually mean little. We are seeing many different areas, however, showing improvement, and historically when you get a lot of different areas perking up that is a sign of change. It may not mean a turn right back up, but if it sustains it means the worst is over.

That would not be a surprise. By the time our government acts it is often out of step with the cycle. Or you can take the even more cynical view: why was there such a rush to pass a stimulus bill that was really a social engineering bill without letting anyone see it as promised and indeed required by our law?

In any event, there are signs that the economy may be trying to bottom. Hopefully it is not just a rest station or a pause before more weakness, but some firming that will lead to improvement. Needs to; the stimulus bill is going to be a dud.

Examples. This week we saw several indications that retail sales were not continuing down the sewer as many expected. Same store sales last week were not that great, but as noted at the time they were not down nearly as much as expected. Moreover, some were actually good. Retail sales were out and they rose for the first time in seven months. We tried to tear it apart but could not find any gaping hole or reason that wiped away the strength. Thursday several restaurants reported sales much better than expected. Friday ANF beat street earnings estimates.

Further: Regional manufacturing reports are rebounding from recent lows. The ISM service has improved for two months after its low. The ISM is showing a bounce after hitting a low. Pending home sales and existing home sales are up with existing home inventories well off the highs. Foreclosures jumped but then fell. The price drops and mortgage rate drops in the market have worked to flush out a lot of the weakness in California, Las Vegas, Florida, and some parts of Arizona.

Credit markets are improving. Bond yields rallied with the 10 year topping 3% and the 2 year 1%. They slid back some but are on the bounce and that indicates firming conditions. As reported a couple of weeks back swap spreads are narrowing considerably, a sign of a healthier market. Friday we learned that the junk bond market sales tripled in the latest report to the highest level since June, well BEFORE the major issues in the financial crisis hit.

As noted, any one of these or even two or three is a yawner. All together, however, and it shows there is something afoot. Again it can be just a bump or a pause before things worsen again. Maybe. What we do know is that this is the kind of stuff we saw back in late 2002 when the market showed signs of trying to bottom similar to what we are seeing now. At that time it paid to keep close attention to these and also to leading stocks. We are, as you know, doing both. There are many great stocks from many sectors that are in very good position technically. That is something a weak rally or a failing rally won't have. Interesting.

China economy picks up speed as we use an emergency to forge social policy.

A bit of soap box so skip it if you don't want to hear it. Just a warning.

A 1,071 page bill is being voted on without the 48 hours promised for everyone in America to read it before voted upon. That 'new transparency' is worth the words it was stated with, i.e. nothing. The bill was available at 11PM Thursday night.

China put its stimulus bill to work and of course it didn't need any votes. It was hatched and put into action. That is how a communist system can work: it has some efficiency. Of course we would not trade our system for that just for efficiency.

No, instead our leaders use emergencies and crises to forge policy they would otherwise not survive the light of scrutiny. Obama's chief of staff is on video in November 2008 saying that no crisis or emergency should be allowed to pass without using it to force social agendas that would not otherwise be able to pass. My stomach fell as I saw that. I thought that perhaps it was just Pelosi and company running over the President and inserting whatever they wanted in the bill. Given his chief of staff's comments it is not too hard to draw the lines of concerted action. It confirms every fear the Founding Fathers had in big government: when able it would do whatever it could to grow and foist new regulation and rights limitations on its people.

Never mind that it is chocked full of waste and useless spending that was tried and failed in the Great Depression. That is sickening in itself as we will pour $800B of our money down the drain. What is worse is that we are giving up our right as citizens to have social policies altered without any debate or discussion on the floor of the Congress. The most horrific is the national healthcare foundation that is laid in the bill as discussed Thursday night. Without ANY discussion this was slipped in just as Tom Daschle had advised Obama in 2008. Just as Obama's brass knuckles chief of staff said should be done, the bill was used to change policy.

In short we have been lied to and treated as the stupid sheep our leaders think we are. They don't have the guts to stand up and say what they are doing. They try to be sly and clever and trick us all. That is not the legacy of our Founding Fathers who stood up on principle and on threat of death when they created our country. I have seen political chicanery up close all my life. This is just about the most disgusting abuse of the public trust, at least on this massive scale, ever. As I told my wife, if this continues it won't matter if you stay in the US or go to Australia, Europe or any supposed republic or democracy as we will be the same.

THE MARKET

MARKET SENTIMENT

VIX: 42.93; +1.68VXN: 43.11; +1.12VXO: 42.75; +0.95

Put/Call Ratio (CBOE): 0.89; -0.01

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

This is a historical milestone in the making. Bulls are impressively low considering we are in general a very optimistic country. The few bulls is a positive indication because it means most everyone that is getting out is out and there is money on the sidelines. In other words the ammunition boxes are full and as the market recovers investors will start opening up the boxes and firing. Little by little they will be forced to put more money into the market and there will be some rushes higher in fear they are missing the train. You relish times when sentiment is so negative because it means some tremendous buys are setting up. This could indeed be the opportunity of a lifetime, and you take advantage of it by buying quality stocks and letting them work for you as long as they will. If we can hold them for years, great.

Bulls: 35.2%. Held steady for the second week. Up from 34.8% the prior week after a one-week move below the 35% threshold considered a bullish indication. Down from 43.0%, the current top of the recovery as the market rallied off the November low. A rise from 25.3% in December and quickly starting to fall once the market encountered the January selling. Above 35% does not mean the action is now bearish. That level is up at 55%. Bullishness bottomed on this leg lower at 21.3% in November 2008. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: Held steady at 36.3% as well. Down from 38.0%, the recent peak over the past month as bearishness rose again. Hit the 34's on the lows, falling from 38.5% and 46.2% in mid-December. Still above the 35% level considered bullish for stocks, but as with bulls, still well below the level considered bearish for stocks. Bearishness hit a 5 year high at 54.4% the last week of October. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment on this move. 35% is the level that historically indicates excessive pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.

NASDAQ

Stats: -7.35 points (-0.48%) to close at 1534.36Volume: 2.006B (-18.59%)

Up Volume: 840.232M (-812.186M) Down Volume: 1.171B (+389.112M)

A/D and Hi/Lo: Decliners led 1.14 to 1Previous Session: Advancers led 1.03 to 1

Not a great week for the market with that Tuesday drop on the Geithner plan without a plan. After that the indices held their ground, at least outside of the Dow. As discussed Thursday, the drop was on disappointment about the lack of a plan. As seen Thursday, however, as the 'plan' is released piece by piece the market bounces. Thus despite the loss on the week the indices remain in decent shape, particularly NASDAQ and its brethren.

One thing this market has is some solid leadership. While the NYSE indices were down and rather weak, the plays on the report held solid. More than that, they worked on their patterns, building toward another break higher. As noted above there are chips, techs, metals, biotechs, agriculture, energy and others in good patterns that went through the week in very solid fashion.

Some say the leadership stocks are performing because China is recovering. There is already a pickup in materials demand again as China emerges from its post-Olympics hangover. The building binge leading up to the Olympics was at an unsustainable pace. Now that the party is over, the dust has settled, and China has put in a massive stimulus plan directly into its economy, it is moving again and demand for products is up again. Just look at oil. It appears to have bottomed in the mid-thirties.

Okay, so it is China. Or the moon phase. The Steelers winning the Super Bowl. Putin dissing Michael Dell. Do we really care? That might be nice for the history books, but we want to make some money off of stock market moves, and these solid bases in quality stocks say some good things about the upside despite a pathetic pattern on DJ30.

There are lots of theories as to what will happen and why. Friday there was the usual speculation about what point the Dow would fall to. Six thousand was thrown out and that is a plausible level given the 1996 lateral consolidation, but that is a bit high; more like 5600 if that is the case. Before that there is a lot of support at 6900ish. Below that the 1994 year long consolidation at 3900 to 4000 is a possibility. ANY of these could act as support if the Dow crumbles through the November low and the 2002 at 7200. Given DJ30 has come within 250 points of that low in November and has held in the current consolidation, that indicates there is some pretty good support there.

The point: if DJ30 breaks down it is going lower and there is nothing we can do to stop it. We just have to take what the market gives us. Right now it has not crumbled through that level. It has not even made it to that level. It could and even then that doesn't mean NASDAQ, NASDAQ 100 and SOX will follow it all the way down. Indeed there are many of those good leadership stocks in good patterns showing strength. This kind of leadership is unusual for a market that is going lower. They could always crack and follow, but they sure did not show that as something they wanted to do last week when they had, once again, a golden opportunity to do so. Thus we go with what looks and acts strong right now, and there is a rather broad range of stocks that applies to.

Support and Resistance

NASDAQ: Closed at 1534.36Resistance:1536 is the late November 2008 peakThe 50 day SMA at 15371542 is the early October 2008 lowThe 50 day EMA at 15561565 is the second low in October 2008The 90 day SMA at 15661569 is the late January 2009 peak1603 is the December peak1620 from the early 2001 low1644 from August 20031666 is the January 2009 peak1752 from 20041782 from August 20041786 is the November 2008 high. Key level.1948 is the early October 2008 gap down level

Support:1521 is the late 2002 peak following the bounce off the bear market low1493 is the October 2008 low & late December 2008 consolidation low.1460 is the February low1434 is the January low (1440.86 closing)1428 is the November 2008 low, the bear market low1398 is the early December 2008 low1387 is the 2001 low1295 is the November 2008 low

S&P 500: Closed at 826.84Resistance:839 is the early October 2008 lowThe 10 day EMA at 839The 18 day EMA at 844848 is the October 2008 closing low853 is the July 2002 low857 is the December consolidation low866 is the second October 2008 lowThe 50 day EMA at 870878 is the late January 2009 peakThe 90 day SMA at 885889 is an interim 2002 peak896 is the late November 2008 peak899 is the early October closing low919 is the early December peak944 is the January 2009 high965 is the 2003 consolidation low995 from June 2003 consolidation peak1008 is the November 2008 peak1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.

Support:818 is the November 2008 low815 is the early December 2008 low812 is the February low804 is the low on the January 2009 selloff800 is the March 2003 post bottom low768 is the 2002 bear market low741 is the November 2008 low

Dow: Closed at 7850.41Resistance:7867 is the early February low7882 is the early October 2008 intraday low. Key level to watch.7909 is the early January low7965 is the mid-November 2008 interim intraday low.The 10 day EMA at 80148141 is the early December low8175 is the October 2008 closing low. Key level to watch.8197 was the second October 2008 lowThe 50 day EMA at 8386The 50 day SMA at 84138419 is the late December closing low in that consolidation8451 is the early October closing low8521 is an interim high in March 2003 after the March 2003 lowThe 90 day SMA at 85608626 from December 20028829 is the late November 2008 peak8934 is the December closing high8985 is the closing low in the mid-2003 consolidation9088 is the January 2009 peak9200 is the July peak in the 2003 consolidation9323 From June 2003 peak9575 from September 2003, May 20019654 is the November 2008 peak

Support:7702 is the July 2002 low7694 is the February intraday low7524 is the March 2002 low to test the move off the October 2002 low7449 is the November 2008 low7282 is the October 2002 low

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.